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BIS Report Says Japanese Banks Vulnerable To Funding Shocks

Due to the increased exposure to the U.S. dollar, Japanese banks are vulnerable to funding shocks according to the Bank for International Settlements (BIS).

A report from BIS states that since 2007, Japanese banks have seen a doubling of their borrowing and lending in dollars, leading to increased risks. The BIS made these observations in its annual report on the global economy.

BIS which acts as the coordinating body for the world’s central banks stated that the assets on the balance sheets of Japanese banks denominated in US dollars were estimated to be worth $3.5 trillion at the end of 2016.

The value of assets is more than that of liabilities by about $1 trillion, resulting in what’s called a long position.

Another country with similar pattern of holding was Canada. The BIS report pointed out that Canadian lenders had nearly doubled their dollar exposure since the 2008 financial crisis.

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The net long positions of these organizations are now at almost $200 billion according to the BIS. European financial institutions on the other hand have slashed their exposure to the US dollar since the crisis. German banks which were among the highest dollar positions in 2007 now have matching assets and liabilities in dollar terms.

The BIS noted that during the financial crisis, the net exposure of European banks was at its highest at around $2 trillion leading to several firms collapsing from the subsequent lack of funding and massive losses from their attempts to get rid of U.S. mortgage-related assets.

Post-crisis regulation worldwide has strengthened capital resources of banks so as to withstand such shocks but the risks are still significant, particularly in short term funding. Regulatory policies implemented since 2008 have also caused shrinking in the U.S. money market funds industry which provides banks across the globe with short term access to dollars.

In a statement the BIS said

Banks’ continued reliance on short-term U.S. dollar funding remains a pressure point. Questions remain about the resilience of funding under more stressed conditions

Banks have shifted to other sources to meet their short term dollar funding requirements but in case of another financial crisis if these sources were to disappear, it might hit banks hard.

BIS observed that much of the dollar funding for non-U.S. banks estimated to be $4.1 trillion was coming currently from deposits outside the U.S.

The BIS report also noted that the persistent low-interest rate regime in several countries was affecting the profitability of banks.


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